Information Aggregation and Prices

Abstract

Economists commonly interpret market-clearing prices as the signals that competitive markets transmit to economic agents to facilitate the efficient allocation of resources. Informational decentralization theory formalizes this interpretation by characterizing the market mechanism as the unique decentralized mechanism that achieves efficient allocation with the minimal required communication. Rational expectations equilibrium theory formalizes a different aspect of the interpretation, showing that markets transmit to each trader all of the decision-relevant information in the market.